The Eumaeus Guide to Equity Release Valuation

Restating the Case for a Market Consistent Approach (Second Edition)

By Dean Buckner & Kevin Dowd

The Eumaeus Project, UK & Durham University, UK.


• The UK equity release sector is permeated by poor valuation practice: as far as we are aware, not a single equity release firm is valuing its No-Negative Equity Guarantees (NNEGs) in a scientifically valid manner.
• This NNEG under-valuation problem is on a large scale and implies correspondingly large over-valuations of Equity Release Mortgages (ERMs).
• The Discounted Projection or ‘Real World’ approach used by the equity release industry is inherently flawed and produces valuations that violate bounds that are known to be inviolable.
• The only scientifically valid valuation approach is the Market Consistent approach, which is also the only approach compatible with accounting principles and technical actuarial standards.
• This manual provides a guide that explains how NNEGs and ERM should (and should not) be valued.


Disclosure Statement
Executive Summary

Part I
NNEG Basics

1. Introduction

2. Origin and History

3. The Basics of NNEG and ERM Valuation

Part II
Key Inputs
4. Loan-to-Value Ratio

5. Risk-Free Rate

6. Loan Rate

7. Net Rental Yield and Deferment Rate

8. Dilapidation

9. Volatility (I)

10. Mortality

11. Long-Term Care

12. Delayed Possession

13. Credit Spreads

14. Drawdown

15. Prepayment

16. Fees and Charges

Part III
17. Scenario Analysis and Stress Testing

18. The PRA’s Good Practice Principles

Part IV
Competing Approaches to Equity Release Valuation
19. The Market Consistent Approach

20. The ‘Discounted Projection’ Approach

21. The Tunaru Report

22. Just’s NNEG Valuation Model

Part V
Professional Standarts and Recommendations
23. Technical Actuarial Standards

24. Accounting Standards

Part VI
25. Recommendations for Good Valuation Practice

26. Recommendations for Governance


About Author

Dr. Dean Buckner worked at the FSA and then the Prudential Regulation Authority and Bank of England for nearly 20 years, specialising in derivative and asset valuation and capital modelling in both the banking and life insurance sector. He is now retired from the Bank.

Dr. Kevin Dowd is professor of finance and economics at Durham University.



Date of Publication

June 29, 2022

File Size: 4686 KB
Length: xv + 223 pages

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